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Financial Advice

Sox_Fan

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I'm sure a lot of you are a lot more financially savvy than I am so I thought I ask some advice from my THP brethren. After recently cashing in some stock options, I have the means to pay off the mortgage on my house but it would leave me with less than $20k in cash reserves. To give a little background, I have a wife that does not work and one 12 year old daughter at home and am employed by the largest drug store chain in the world. I am currently 6 years into a 15 year fixed mortgage with a 4% rate. I have always been they type that likes to keep a nice cash reserve "just in case" but it sure would be nice not to have the huge monthly payment. Without the mortgage payment, I'm sure it wouldn't take long to build some reserves back up. I would apply the money I was paying for mortgage to a combination of cash savings and increased 401K contribution.

Thanks in advance for the advice.
 
Financial Advice

I would pay off the mortgage then build the cash reserves then invest.

ETA: with no mortgage and assuming not much other debt I would be comfortable having just like 10-12k in reserves while building back up to 20k minimum with no mortgage.
 
Sox Fan said:
I'm sure a lot of you are a lot more financially savvy than I am so I thought I ask some advice from my THP brethren. After recently cashing in some stock options, I have the means to pay off the mortgage on my house but it would leave me with less than $20k in cash reserves. To give a little background, I have a wife that does not work and one 12 year old daughter at home and am employed by the largest drug store chain in the world. I am currently 6 years into a 15 year fixed mortgage with a 4% rate. I have always been they type that likes to keep a nice cash reserve "just in case" but it sure would be nice not to have the huge monthly payment. Without the mortgage payment, I'm sure it wouldn't take long to build some reserves back up. I would apply the money I was paying for mortgage to a combination of cash savings and increased 401K contribution.

Thanks in advance for the advice.
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If I were in this situation I would pay off the house. I dont like debt of any kind and the way it can handcuff you in situations. If something happens and you arent able to put the "non-mortgage" payment into reserves it wont kill you, but if something happens and you arent able to make the actual mortgage payment thats a problem!
 
Sox Fan said:
I'm sure a lot of you are a lot more financially savvy than I am so I thought I ask some advice from my THP brethren. After recently cashing in some stock options, I have the means to pay off the mortgage on my house but it would leave me with less than $20k in cash reserves. To give a little background, I have a wife that does not work and one 12 year old daughter at home and am employed by the largest drug store chain in the world. I am currently 6 years into a 15 year fixed mortgage with a 4% rate. I have always been they type that likes to keep a nice cash reserve "just in case" but it sure would be nice not to have the huge monthly payment. Without the mortgage payment, I'm sure it wouldn't take long to build some reserves back up. I would apply the money I was paying for mortgage to a combination of cash savings and increased 401K contribution.

Thanks in advance for the advice.
Click to expand...

So long as the $20K reserve can fund 6 months of living expenses I would say go for it.
 
Get the mortgage paid off.

Invest in Retirement/Education and Savings.

Thats what I would do, in the order I would do it.
 
I will go the opposite, but only depending on what the mortgage rate is. If your savings and funds are returning more than your interest rate on the home, I would go that way. The way real estate goes now, its not quite the "investment" as it once was and the earnings off of that property could actually be lower than the money going towards funds.
 
#Cookie said:
I would pay off the mortgage then build the cash reserves then invest.

ETA: with no mortgage and assuming not much other debt I would be comfortable having just like 10-12k in reserves while building back up to 20k minimum with no mortgage.
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No other debt currently. Wife's car paid for, company car for me and pay off all credit cards monthly. Both older children out of college also.
 
Don't pay your mortgage off. You're interest rate is lower than the average return on the S&P 500 ETF (~9%)
 
Can you refinance the mortgage? 4% seems like a high rate for a 15 yr.

I'll echo JB, if your investments can gain more than what you pay in interest, it's not so bad to hold onto that debt.
 
I understand those that say the rate is better to invest versus paying off mortgage....and numerically that makes sense.

But in this case, I'm one that will kill that debt for peace of mind. Wrong perhaps, but it's what I would do in your case.
 
#Cookie said:
I understand those that say the rate is better to invest versus paying off mortgage....and numerically that makes sense.

But in this case, I'm one that will kill that debt for peace of mind. Wrong perhaps, but it's what I would do in your case.
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This obviously is an important factor too.

Don't forget that interest payments on your mortgage are tax deductible. That throws another wrench in the gears.
 
I paid off my morgage. And with the housing slump that our small town has had the last 3 years.
It has really made a difference. Don't need much of an income without the $1000.00+ morgage.
The tax liabilities are negligible. And your assets to debt ratio looks very good.
 
#Cookie said:
I understand those that say the rate is better to invest versus paying off mortgage....and numerically that makes sense.

But in this case, I'm one that will kill that debt for peace of mind. Wrong perhaps, but it's what I would do in your case.
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Im with you here Cookie, the freedom and security that comes with having no debt is worth more to me than a return on investments.
 
There is a sense satisfaction of living in a house that is paid off, but if the cash you will use is making more than 4% keep your cash earning $$
 
I would invest that money instead. Your interest rate is low, why pay it off. You can make more than 4% easily by investing it.
And if you pay it off you get no tax break. So it doesn't make much sense to me to pay it off early.

If you have any other debt at all pay it off first. Cars, credit cars etc...

I see people pay off their car loans early but have $thousands in credit card debt with a higher interest rate?
That doesn't make sense to me either.
 
All the above sounds solid. However I would consult a financial advisor - unless some of the folks above are in the field. When I was considering paying off our mortgage, I went to our bank (Wells Fargo). They hooked me up with their financial advisor, at no charge, who did a complete financial work-up on me and my wife, reviewed our short-term and long-term plans, in addition to what we thought we wanted to do in retirement. Six years into retirement I still use his services, and his advice has been very good for us. He is always available via phone, and we meet at least every six months face-to-face to review our situation. We're not "big" clients for him, but he treats us as if we are.

Even if you don't use their advice, you'll at least have some ideas. Good Luck.
 
I would only pay off the mortgage if the interest rate is higher than the interest rate on any other debt you might have. Then, if a cash reserve is important, figure out what you want that to be. Sock that away. Anything left over, use towards the highest interest debt, assuming that interest rate is higher than what you could get investing it.
 
I can see both sides of the fence. If you decided not to pay off the mortgage, however, would you be investing the whole sum of that same amount? If the interest rate is higher on the potential investments, but you're only going to investment half the amount of your mortgage payoff, you might as well pay off the mortgage.
 
Your primary concern appears to be security. You would be employed with no debt. Your house would be paid off. How much more secure do things get than that? Given those fundamentals, a 20k reserve should last you a long time.

The tax and earnings questions may be a bit more nuanced than they appear at first glance. Your earnings have to exceed 4% plus your tax on the profit. The market is great right now but anyone with a 401k can tell you that it was hard to earn 6% the prior few years. There's no guarantee things continue on like this. It is true that you lose the mortgage deduction. You should figure out how much your itemized deductions exceed the standard deduction.

But over and above all that, how - if at all - is the potential extra interest earning and tax break helping you achieve your ultimate goal of security? Are you disciplined enough to save / invest that extra money or apply it to the principle of the mortgage? If not, the money may have illusory value to your objectives. In which case I pay off the house.
 
I think many have offered sound advice, and I think you really could be fine either way. The things that I would think about are these:

How much can you earn off your money. I know banks aren't paying anything for deposits, so that really leaves the stock market as the only hope for a return. You cashed in stock options, so it would seem you're not against investing in the market, so if you can find a good enough return, that seems like a good choice.

The other thing to think about is your reserves and the dreaded "what if" scenarios. 20k seems like a decent nest egg, especially without a house payment, but what happens if you somehow burn through that and need more? You could take out another mortgage on your house, but it will be at higher than 4%.

Essentially, if you can earn more than 4% investing it, that makes the most sense to me because 4% is a pretty decent rate on a house (not as low as it could be), but you likely won't see borrowing rates that low for awhile, if again, so I say keep your assets liquid just in case.
 
Thanks for all the advice. Sounds like a mixed bag so far. Kind of like the pondering in my own mind....
 
One thing I haven't seen mentioned is financial aid for your 12 year old come college time, with no mortgage payment you will be expected to pay more towards her college. Not sure if this is an issue but worth mentioning.
 
Another thing. Some debt is good. It builds up your credit score. When your young, that is difficult to do.
 
Could I possibly refer you to a financial advisor in your area that could answer your question in more detail? It sounds like you are in a decent financial position now, and several different options could be explored. Please PM me if I could be of help to you. Best of luck.


On my iPhone T.. T.. Tapatalking away!
 
If I have the opportunity to have it all paid off I would. my thought is its better to have it all paid for so you can invest the money now and save it. I'm not a fan of monthly payments besides like utilities.

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